June 27, 2003	Friday	Rabi-us-Sani 26,1424

KARACHI, June 26: The State Bank has cleared confusion about the government’s claim of 5.1 per cent GDP growth in the fiscal 2002-03 that has been challenged by independent economists. The SBP’s third quarterly report says that the GDP growth rate of 5.1 per cent falls to 4.6 per cent if the prior year adjustments that altered the base for this fiscal year are netted out.

“Notwithstanding, the impressive performance of the economy, the estimated 5.1 per cent growth in real GDP (against the 4.5 per cent annual growth target) requires some explanation,” says the report released here on Thursday.

“It appears that a part of the above target growth is simply a function of prior year adjustments that altered the base for the FY03 growth. Adjusting for these, the estimated growth for FY03 comes down to approximately 4.6 per cent in line with the SBP projections and still above the FY03 growth target (reflecting the actual improvement in the economy).”

The report says that the agriculture sector may grow by 3.4 per cent and manufacturing sector by 5.8 per cent this fiscal and services sector may show a 5 per cent growth. All the numbers have been worked out after netting out the prior year adjustments that altered the base for FY03. Without caring for these adjustments the growth rates would be perfectly in line with what the finance minister claims — agriculture 4.2 per cent manufacturing 7.7 per cent and services 5.3 per cent.

AGRICULTURE SECTOR: The SBP report says the agriculture sector posted an impressive recovery mainly due to growth in major crops and higher canal water availability coupled with timely rainfall.

“The entire growth in the major crops seems to stem from the improvement in the yields,” says the report, adding that during the entire FY03 the market prices of rice, cotton, maize and wheat during post-harvest period remained higher than in the past. “This helped improve the financial position of farmers ...and may lead to increased focus on these crops in the next season.”

LSM: The report says that large scale manufacturing recorded a remarkable growth as all LSM sub-sectors except for leather products witnessed an increase in output during July-March 03.

“However, tremendous growth in the production of automobile, electronics and construction related industries on the back of robust domestic demand, has been the highlight of LSM growth.”

“The increasing availability of consumer financing, sustained growth in remittances, robust growth in agriculture accompanied by increase in productivity, etc., have been the major factors boosting domestic demand,” the report says. “As a result, the production of the allied industries such as tyres and tubes, paper and board, cement, steel and chemicals also saw increases. The textile industry too, performed well on the back of rising exports of textile products.”

FISCAL POSITION: The government was successful in containing the budgetary deficit in line with the full year target during July-March 03, says the report, adding the government is likely to achieve the revised budget deficit target of 4.6 per cent of the GDP.

“An improvement in the fiscal position of the government is the result of a good performance of both tax and non-tax revenues,” the report notes.

MONEY AND CREDIT: A host of factors, including substantial rupee liquidity through SBP forex purchases, strong deposit growth and lower net requirement from the government sector, kept the interest rates under pressure during July-March 03.

“The resultant decline in lending rates and rising aggregate demand in the economy led to an exceptional rise in net private sector credit,” says the report. “Although the increase in aggregate demand had been apparent even prior to the November 2002 discount rate cut, credit offtake only accelerated thereafter,” it adds.

BANKING: Deposits of the banking sector grew 11.6 per cent in July-March 2002-03, according to the SBP report.

Bank deposits grew 4.1 per cent in January-March alone. “This unprecedented growth stemmed entirely from the rupee deposits, as forex deposits continued to decline,” it says, adding that an exceptional rise in remittances as well as increase in public sector enterprises’ and the government deposits led to this impressive growth.

Low lending rates along with the strengthening economy led to exceptionally strong credit disbursements, which recorded a Rs210.9 billion increase during July-March 03 compared to the same period of FY02. “This unusual rise in overall credit was headed by a surge in the private sector credit.”

EXTERNAL SECTOR: The external sector continued with the trends set in the previous quarters by posting yet another large surplus of $2.1 billion during Q3 FY03 despite a rising trade deficit and services outflows.

“The main drivers of the surpluses were the continued buoyant growth in workers remittances, logistic support receipts, declining interest payments on external debt and liabilities and higher official transfers mainly due to $1.0 billion write-off from the US.”

“This helped the SBP in maintaining its heavy inter-bank forex purchases during Q3 FY03 raising the SBP forex reserves to $9.5 billion and moderating the rupee appreciation,” says the report.